I often see people try to give investing advice on the internet. They state rules like: keep a broad and diversified portfolio, buy index funds instead of stock picking, don't touch options, don't buy stocks on margin. These are great rules that should be followed by every investor, but just stating out these rules is a pretty ineffective way to persuade a new investor into following these rules. I believe a better way would just be to showcase what happens when you break all of the fundamentals rules of investing.
Let's dive into the world of Wallstreetbets.
What is Wallstreetbets
I think I should do a brief introduction on what Wallstreetbets is before we start. Wallstreetbets is a Reddit community with 3.2 million members where people discuss and practice degenerate trading strategies. Most members trade stocks or options on a platform called Robinhood because they offer commision free trading for options. It's a place where all investment fundamentals are ignored and a place where people treat the stock market like gambling in a casino with leveraged options trading, 0 DTE options, or buying highly speculative meme stocks on margin.
u/1R0NYMAN
1R0NYMAN is a legend on Wallstreetbets because he managed to lose $59,000 on a trade originally worth $5,000, a -2000% return. How is it possible to lose more than you put in? Well 1R0NYMAN was looking for ways to generate high returns for his account without taking any of the risk. The problem is that if you want really high returns, the only option is options (nice pun). Options are super high risk and super complicated with hundreds of different strategies that are really hard to understand. During his research, 1R0NYMAN discovered one of those really complex options trading strategies called "Box Spreads". Box spreads are an arbitrage strategy, meaning it basically gurantees profits if the strategy is played perfectly and certain conditons are met. Normally the box spread strategy is really difficult to pull off because the margin of profit is really low, meaning to make decent money you would have to have a lot of initial capital, and also the commissions and fees that comes with trading options normally eats away all of the already extremely low profits. But 1R0NYMAN remembered that Robinhood offers 0 commissions options trading, and this seems to make box spreads a really good strategy on Robinhood. He then came up with a plan to trade options using box spreads that guranteed $30,000 in profits. However, I mentioned that box spreads is only risk-free if certain conditions are met, well one of those conditions is that you would have to be trading European options and not American options, because European options cannot be exercised until the expiration date, but American options (which 1R0NYMAN was trading) can be exercised prior to the expiration date. This is a problem because box spreads only give guranteed profits so long as nobody exercises your options, and if somebody does exercise your options, the max loss that 1R0NYMAN faced was around $200,000 when he only had $5,000 in his entire Robinhood account. 1R0NYMAN missed this critical information during his research. And you can probably guess what happens next, 1R0NYMAN's options got exercised and he ended with a $53,000 loss. Within the same week Robinhood banned box spreads from the app and it is still banned today.
u/Sad_Nefariousness10
Sad_Nefariousness10 was a junior in college studying math when his grandma generously left him an $800k inheritance after she died. Now, Sad_Nefariousness10 has heard stories before of how people blew up their inheritance money by spending it on garbage, so he decided he would take $100k of the inheritance and put it in a safe high yields savings account. He then decided he would buy stocks with the other $700k. After a bit of research, he decided to spend the entire $700k on buying Intel stock when Intel's stock price was around $30 right before Intel released their earnings report. He had good convictions for Intel and now he just has to wait for Intel to release their amazing earnings report and their stock price will rocket up. After the market closed, Intel's CEO, Pat Gelsinger, announced their earnings. It was not good. Analyst expected an EPS of 10 cents, but Intel only managed to get 2 cents. However, if Intel stuck to standard accounting practices, they would have had a loss of 38 cents per share. Intel also forecasted that their EPS of next quarter would be a loss of 3 cents. Furthermore, Intel announced that they would completely cancel their dividends, lay off 15,000 employees (around 15% of their work force), reduce R&D, marketing, and administrative spending, and they even removed free coffee and fruits from their offices because they couldn't afford it anymore. Pat Gelsinger then said that things would potentially get better in the next few years, and ended the report. He then started posting scriptures and prayers on Twitter.
All of Intel's investor immediately knew it was over and they started dumping their stocks. Intel shares dumped 24% after the announcement in afterhours, the stock dropped from $30 to $23. And after the market opened it didn't get better, the stock continued dumping to around $21 per share. Sad_Nefariousness10 had now lost around $200k of his grandma's inheritance money. He then posted on Wallstreetbets saying that he wasn't wrong about Intel being a good company, he just had bad timing and he was planning to hold for 10 years. He then deleted his account. The funny thing is that if he had actually held his stock until today, he would've made profit, but we will never know if he held or not because he deleted his account.
u/ControlTheNarrative
A Reddit user called ControlTheNarrative is an absolute Wallstreetbets legend and deserves to be in the Wallstreetbets hall of fame. He discovered a glitch on Robinhood that lets him borrow $50,000 with 0 collatoral when he only had $2,000 in his Robinhood account, effectively a 25x leverage. He then used this $50,000 of borrowed money to buy Apple put options (you make money on put options if a stock drops) right before Apple announced earnings, because he believed that Apple's earnings will be horrible and the stock will tank. Turns out Apple beat their earnings estimate and Apple stock soared, and Mr. ControlTheNarrative's put options lost basically all of their value. And he now owes $50,000 that he doesn't have. His discovery led to many other Wallstreetbets members to also leverage their accounts to insane amounts, some even managed to leverage their accounts to millions of dollars. This led to Robinhood revamping their entire margin feature and terms of service.
ControlTheNarrative also recorded his reaction to him losing his borrowed money when the stock market opened Here is the video you can see his positions go from 57k to 10k in seconds.
Conclusion
Moral of the story: there is no way to get rich quick in the stock market. Stick to fundamentals, be diversified and buy index funds like the S&P 500 or a total market fund like VT or VTI, consistently invest a portion of your income into the market and your growth will compound over time, don't try to time the market, always be invested, don't invest in speculative assets like meme stocks or crypto (I will write about crypto in the future), and don't be greedy.